US mid-market: Fundraising slowdown's knock-on effect

Mid-market fundraising in the US fell slightly compared with previous years, prompted in part by a slowdown in exit activity.

US mid-market firms raised $80 billion across 121 funds in the first three quarters of 2016, according to PitchBook, which indicated in its latest report that this is on pace for a 9 percent decrease in capital committed compared with 2015. The number of funds closing in 2016 is likely to be the same as in 2015.

Eric Zoller, founder and partner at Sixpoint Partners, attributes the decline in fundraising to a drop in exits. “Fundraising is down because exits are down,” he says. “With fewer exits, it's taking longer to go back to market since funds need to be at least 70 percent invested before being able to fundraise their next fund.”

Zoller, who sees 2016 as a pivotal year after a couple of strong fundraising years in 2014 and 2015, says it is taking longer for US mid-market firms to fundraise. “It's not necessarily more difficult to raise, but LPs are spending a lot more time in the negotiating process.”

He notes the length of fundraising has gone up to 17 months on average in 2016 from 14 months in 2015, according to do to Sixpoint's calculations.

Meanwhile, some US mid-market funds continue to struggle with the Alternative Investment Fund Managers Directive and the need to passport to market in Europe, although they haven't completely given up on raising money from the region. “They'll do a little bit more reverse solicitation,” says Jeff Davis, a partner at Eaton Partners. 

“They also may not necessarily passport to all of Europe. They may just go to easier countries, like the Netherlands, the UK and maybe Sweden or Denmark rather than trying to register in the more difficult countries like France, Italy or Germany.”

Davis says that first-time managers and other mid-market funds that decided to forgo marketing in Europe all together instead found capital in the Middle East and in the Asia-Pacific region.

Looking forward to 2017, fundraising professionals expect to see a continued interest from limited partners for first-time funds and for specialised funds, particularly in the healthcare and technology sectors.

“It's driven by the search for higher returns,” says Davis. “For individual LPs it's also about searching for customisation. They think perhaps they have enough diversification and want some more specialisation.”